Westpac CEO Peter King says rate hikes will reduce spending and GDP

Westpac expects the cash rate to rise to 1.75% by the end of this calendar year, from 0.35% today and 2.25% in 2023. The bank also expects prices to real estate in Sydney and Melbourne will fall by 9% next time. year.

Guided by its chief economist, Bill Evans, Westpac expects the economy to grow 4.5% this year, but then slow to 2.5% in 2023 as rate hikes begin to bite. It was similar to the RBA, which said on Friday that GDP would rise by 4.25% this year and fall to 2% in 2023.

The impact of a 25 basis point rise in the economy is greater than before.

— Westpac CEO Peter King

Westpac expects credit growth to increase to 5.7% this year but slow to 4.3% in 2023 as higher interest rates reduce borrowing capacity. However, he said on Monday he was willing to lend more to property investors to support the market.

The bank said it expected many recent borrowers to cut discretionary spending next year, given they had less time to build up reserves. Three years ago, he fought the corporate regulator in the so-called “wagyu and shiraz” case, in which the Federal Court found Westpac did not violate responsible lending laws. The bank made its own assessments of borrowers’ loan serviceability instead of following regulator guidelines because borrowers could cut spending on luxury items.

Mr King said the big banks had issued around a quarter of all their mortgages in the past two years, and it is this cohort that may have to cut spending on areas such as home renovations, posh holidays , restaurant dining and entertainment as rates increase.

“More of people’s income will be spent on housing, whether it’s rentals or mortgages, and depending on what kind of rate cycle we see, there could be less income available for more. other discretionary spending,” he said.

“It’s a pretty tricky balancing equation for the Reserve Bank in the next period, and we have higher leverage – so the impact of a 25 basis point rise in the economy is more important than before.”

Curbed enthusiasm

On a $500,000 loan, an additional 2% rate equals $10,000 per year of after-tax income paid to the banks.

“That’s what people need to think about – they need to be prepared for it, and it’s likely to be how the money is spent that will change in the broader economy,” Mr King said.

Growing uncertainty over the effect of the rate hike dampened enthusiasm for interim results at the big four banks, which reported combined cash profits of $14.4 billion, up 5.1 % over the first half of 2021 after growth in business and housing loans as the economy rebounded from the pandemic. Bank profits rose as bad debts fell further, supported by record levels of unemployment.

However, cost pressures and intense competition in mortgages have squeezed net interest margins as management took the knife to spending to maintain profits, the latest season of interim reports showed.

Westpac remained committed to its goal of reducing overall costs to $8 billion by 2024 despite rising wage pressures, with 4,000 employees cut in the half. ANZ and National Australia Bank strayed from previous cost targets, saying rising inflation had been a game-changer.

Across the industry, total operating expenses for big banks fell just 1% to $4.9 billion, KPMG found, as inflation pushed up the costs of running the bank. bank. Banks also continued to invest more in technology to ensure they could compete in the digital economy by transforming legacy IT systems.

Stay focus

Justifying to maintain its cost target, Mr King said Westpac needed to act more aggressively than competitors because its overall cost base was larger. He said he had made gains by selling non-essential businesses, reducing office space (including offshore locations) and reducing the number of transactions carried out at branches by moving more products to platforms. digital.

Advisors and investors said banks face many uncertainties that will keep them under pressure in 2023 and 2024, despite resilient performance so far this year.

“The only thing that’s certain is uncertainty,” said Tim Dring, who leads EY’s banking and capital markets practice in Oceania.

“Supply chains, geopolitical issues, wage pressures and as interest rates rise to fight inflation, there is also uncertainty about how households will cope with these higher rates. .”

Banking stocks have performed well this year as the market priced in more revenue from higher interest rates, as banks’ net interest margins are expected to rise as they widen the spread between the rates charged to borrowers and those paid to savers. Strong capital levels should also help return more capital to shareholders.

But some fund managers think the risks of rising rates could outweigh the positives. Romano Sala Tenna, portfolio manager at Katana Asset Management, was reducing exposure to banks. He believes that bad debts must have finally bottomed out now that rates have risen, which would also reduce borrowing capacity.

“As rates rise, we’re going to see lower loan growth and we’re going to see some stress on the mortgage portfolio at some point. You’re also going to see salary and other cost increases,” Mr. Sala Tenna.